Surging economy bolsters Paschal Donohoe's Brexit budget defences

Surging economy bolsters Paschal Donohoe's Brexit budget defences

Surging economic activity strengthens the hand of Finance Minister Paschal Donohoe in October’s budget — despite the uncertainties of Brexit, a leading economist has said.

Austin Hughes, chief economist at KBC Bank, said the better-than-expected performance will bolster the defences should the next British leader leave the EU without a deal at Halloween.

The comments come as CSO figures showed GDP expanded 2.4% in the first three months of the year from the previous three months and surged by a huge 6.3% from the first quarter in 2018.

Even though the economy grew by a much more modest 1.6% in the first quarter when measured by the more accurate gauge of modified domestic demand, growth appeared to be shared across most of the main parts of the economy.

Mr Hughes said its central guess was that Britain and the EU would agree to delay some sort of transition deal until next year, but that in the event of an abrupt exit at Halloween that the economy would just about skip falling into recession.

“The key question for the budget is to get something that helps grow the productive power of the economy” and not just to inject more spending power for households which is not needed, he said.

Conall Mac Coille, chief economist at Davy, said there was no sign of exports slowing or that consumers were reining in their spending.

A hard Brexit would drag the economy into recession, but Davy predicts that tariffs won’t be imposed around the Halloween deadline, he said.

Jack Allen-Reynolds, senior Europe economist at Capital Economics, said a no-deal exit in October would probably mean the economy here would fall into “a mild recession”.

The CSO figures show that part of the economy dominated by multinationals — information and communication — ballooned in the first quarter and that agriculture output recovering from the winter storms of 2018 also expanded sharply from a year-earlier period.

Financial services, construction, and industry also grew sharply.

Goodbody chief economist, Dermot O’Leary, said the “healthy” story was rounded off by consumer spending growth being driven by new jobs and wages growth, while construction, including the building of new houses, continued to drive investment.

Simon Barry, chief economist at Ulster Bank in the Republic, said the economy appears to have grown by an underlying 3% in the first quarter, about twice the rate of the 1.8% and 1.2% posted by the UK and eurozone in the same period.

“Brexit developments will play a critical role in determining whether what unfolds from here for Ireland is a continued gradual moderation as seems likely if a constructive resolution is found, or a potential sharp deterioration in economic conditions in the event of a disorderly exit, the risk of which is looking uncomfortably elevated given recent political developments in the UK,” Mr Barry said.

After revisions, GDP in 2018 soared by 8.2%.

But the dual nature of the Irish economy in which GDP captures multinational accounting and the huge balance sheets of the aircraft leasing firms is reflected in the official figures: The economy is worth €324bn measured by GDP, or is about third smaller, at €197bn, under the so-called GNI* measure.

That means that the Government’s debt burden is at 64% of GDP, or the much less manageable level of 104% under GNI*.

Meanwhile, sterling which has fallen sharply in the last two weeks, continued to trade at around 90 pence against the euro, reflecting the increased fears a new British prime minister will pull the UK out of the EU without a transition deal at the end of October.

The Central Bank confirmed the Government has granted it power to set another capital buffer for banks — the systemic risk buffer.

And its Financial Stability Report confirmed “a disorderly Brexit” was one of the main risks facing the economy.

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